🥇 Important Insights for Effectively Accounting Inventories
Why Are Inventories Important for a Business?
Every business must treat inventories as a valuable asset. Inventories help the company keep a steady cash flow, supply goods according to demand, and increase profit. Accounting plays a big part in finding out sales, and it also helps with inventory. Each item in your inventory has value, and sometimes, the total worth of your inventory is even more than your bank balance. So, businesses must pay close attention to how they manage their inventories.
What Are the Basics of Inventory Accounting?
Inventory works like cash or amounts you get from your customers. The value of your inventory is shown on the balance sheet, and it adds to the net worth of your business. When you buy goods from vendors, you increase your assets by the invoice value, but you also raise your liabilities because you owe the vendor.
Prices of goods can change quickly, especially for things like oil. In such cases, businesses must check the inventory at the net cost price. You must keep track of your inventories all the time to know the real value and estimate the profits you can expect.
Key Points of Inventory Accounting:
- It shows the real value of inventories for your business.
- It helps you make smart decisions at the right time.
- It leads to better profit and business growth.
Why Is Inventory Accounting Important?
Inventory accounting gives a clear picture of all the goods your business holds. It tracks inventory at every stage—from raw materials, to work-in-progress, to finished products. This system helps you find opportunities where you can boost profits, maybe by raising prices or lowering costs.
Some industries—like medicines, technology, or machinery—spend a lot of money at the start, such as designing or testing products. With inventory accounting, you see the value of your goods at every step. You can then change your plan to keep your inventory valuable by cutting unnecessary costs.
Inventory management is very important in accounting standards. If you ignore it, you might show more profit than you really made, which can make your company look better than it actually is. Remember, profit is just revenue minus costs, and you only earn revenue when you sell the inventory.
Which Inventory Valuation Methods Are Used?
There are different ways for businesses to account for their inventory. Here are some of the common methods:
The Periodic Inventory Accounting Method
With this method, companies don’t update their inventory every time a sale happens. Instead, they check inventory at the end of a period, like a month or a year. They compare the inventory left at the end to what they had at the start. This process shows how much was sold, which helps in finding out the gross profit. Businesses may do a physical count of inventory at the end of the period.
Cost of Sales Inventory Accounting Method
In this method, every sale is recorded in the profit and loss account, and it affects the inventory value on the balance sheet. When a business ships inventory, the asset value goes down, and the sale cost goes up in the profit and loss statement. When new inventory is bought, it is added as an asset.
First In, First Out (FIFO) Method
FIFO is a popular way to value unsold inventory. Here, the first items purchased are the first to be sold. This method is best for perishable goods, such as food and drinks, because it helps use the oldest stock first. It prevents spoilage and ensures a steady supply for customers. Every item received and sold must be recorded one by one when you use this method.
How Mubarak Al Ketbi (MAK) Auditing Can Help
Mubarak Al Ketbi (MAK) Auditing knows inventory accounting inside and out. Our experts help businesses of every size set up simple or complex inventory systems. We solve problems quickly and give you guidance for growth. If you want to avoid biting off more than you can chew, trust our team for the right advice and support.
- For more information, visit our office:
Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates - Or contact/WhatsApp: +971 50 276 2132
